Hello,
I asked HMRC for advice regarding pension relief when having two jobs.
First job, lecturer at University, pays basic rate tax and pays into pension under net pay arrangement (pays pension before tax is calculated, hence got 20% relief in the payslip already).
Second job: working for the EU for just one week, nothing deducted (no tax, no pension). This income brings him into the higher rate band (and this income is included by him in self assessment - on arising basis - so he pays full tax on this).
The question I put to HMRC is that he now is a 40% tax payer due to the EU income, but the employer did not know this extra income was going to incur, so in his only PAYE payslips, only 20% relief has been given. So asked if he can put anything in the pension relief box (box 1).
They gave a blanket no. If his employer applied net pay, tough luck, that amount was then correct. No matter what happens with a foreign second job putting him just over the basic rate limit.
Does anyone know if this is correct? And if not, can he put anything in box one, and grossed up or not?
Many thanks, Bridget
Replies (12)
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His pay has already been reduced by the amount of the gross pension contribution in order to arrive at taxable pay. It is this reduced level of pay (i.e. his taxable pay, rather than his gross pay) that will be included in his tax return. No further entry of pension contributions should be included in the tax return. As income has been reduced, relief will be obtained at his highest rate.
He gets his relief automatically through SA.
His total taxable income is reduced by the pension contributions, where he appears to have received only 20% relief. In a classic calculation, you extend the basic rate band by the pension contributions. However, what happens is that the taxable total is 80% of lecturing pay added to untaxed EU income. This means that the top end of his income has already been reduced in the 40% band. When he does his SA calculation, he gets the extra 20% relief automatically, because an amount of his EU income equal to his lecturer contributions moves from the higher rate to the basic rate band. His employer gave him 20% relief, and the SA calculation gives him the balance.
I concur.
If in doubt enter his gross pre pension salary into a tax calc, enter second income in same then input pension paid (net not gross of sum paid via payroll) into the comp and compare the result with your current calculation re tax liability, it ought to be the same as you currently have.
If he earns (say) £20K in job 1, but pays contributions of (say) £4K, he will only have £16K of taxable income, on which he will have paid some tax via PAYE at 20%.
If he has other untaxed income of (say) £33K, his total taxable income will be £49K, so some will be taxed at 20% and some at 40%. But he's gained the maximum tax relief on his pension contributions because his total income has been reduced by his £4K of contributions.
The extra 20% relief given where someone doesn't have a net pay arrangement is because their income is not reduced by their pension contribution. Instead, the pension contribution is reduced by only 20%.
The relief applied was 40%, it only looks like 20% on the payslips because he wasn't taxed at 40% on the payslips.
Reducing the gross salary for any part of his income reduces how much of it is taxed at the highest rate, therefore relief is always at the highest rate.
Don't look on it as getting 20%/40% of the pension payments as relief, look on it as moving the bands, which is what pension payments do. The first job achieves it by reducing the gross income, the other method to which you refer does it by leaving the income the same but moving the threshold. They both move by the same amount (the gross contributions) so the effect is the same.
I asked HMRC for advice regarding pension relief when having two jobs.
HMRC do not exist to give tax advice to taxpayers and they certainly (as far as "contact centres" are concerned) don't have the technical knowledge to do so.
If you need tax advice, you really need to consult a competent accountant.
I think you are confusing the easily confused terms. In a net pay arrangement, pension payments are made gross so before tax so there is no tax to reclaim. If this is what happened then nothing goes on the tax return since no tax was paid.
If, however, pension contributions were made net as you suggest then the pension provider reclaims 20%. They would never reclaim 40% even if you were a higher rate taxpayer in that job.
So you would then reclaim the extra 20% on your tax return, regardless of whether this job or another job puts you in the higher rate band.
If it's under net paid it's been paid gross (I know but that's what they called it in the 1940's). It's not been relieved; it's not been taxed at all. After the SA and the addition of the EU income the pension contribution has still not been taxed and therefore if it were to be taxed it would be taxed at 40% and ergo it has received full relief by dint of being paid gross.
So you can see an example of how this works Muze:
Net pay arrangement
Gross income of £35,000
Pension contribution of £1,000
Taxable income = £34,000
Second employment taxable income = £16,000
Tax @ 20% = £6,700
Tax @ 40% = £2,000
Pension cost = £1,000
Total cost = £9,700
Relief at source
Gross income £35,000
Pension contribution £800 topped up £200 by HMRC
Taxable income £35,000
Second income £16,000
Total taxable income = £51,000
Tax @ 20% = £6,900
Tax @ 40% = £2,000
Pension cost = £800
Total cost = £9,700